State Subsidised drug users

State subsidised drugs. A good thing?

If the Government were suggesting that they offer subsidies to cocaine users one might expect the odd eyebrow to be raised and if alcoholics were tempted by cheap booze paid for by the tax payer there would be questions in the House. So why in the name of all that is holy are we now offering people who have never bought a house before and who can’t buy one because they are too expensive – a bunk-up onto the housing ladder?

This week we are seeing the detail of the something called ‘FirstBuy’ (written as one word so that the generation already limbered with student debt can relate to it I guess) which offers ‘subject to status’ up to 20% of the purchase price as a loan which should enable them to borrow the other 75% from a traditional lender leaving the poor punter who can’t afford to buy the property any other way with the task of finding the 5% balance. In other words a 95% loan-to-value mortgage.

Those of you who can remember all the way back to 2007 may recall that since the Credit Crunch it was high loan-to-value mortgages that got us into the mess in the first place. People who couldn’t afford to borrow were offered big loans that they er… couldn’t afford and the history looks certain to repeat itself.

Almost all those with a knowledge of the housing market expect prices to fall during the second half of the year. In parts of the UK cheaper homes are already cheaper and some you couldn’t give away. So with just a 5% cushion these vulnerable first time buyers are buying brand new homes from house builders who have put the Government up to this.

New builds often sell for prices that are set by the developer and it is not unheard of for them to have no relationship to the larger second hand market around them. So you could be buying a new flat that is already 5% over priced. Like a new car that depreciates as it leaves the forecourt, your new home could well be worth less after you have spent just one night in it!

If prices slide by 10% as the Halifax have predicted then we are already in negative equity. Until prices return – assuming that they do then this home owner can’t move and like so many first time buyers who bought in the last four years they will be stuck, unable to trade up the ladder.

Still, that won’t worry the house builders who by then will have moved on to clear another green field and built another estate of homes that wouldn’t sell unless the State stepped in to help. The truth is that homes in most parts of the country are over-priced. Figures from HMRC confirm that there were just 68,000 sales in May. Compared to 140,000 in May 2007.

A capitalist market will resolve this by forcing prices lower until people can afford them. By interfering to help ailing house builders the Government is acting like the Child Catcher of Chitty Chitty Bang Bang fame and tempting the most vulnerable with offers of sweets and candies! No wonder 100 developers have signed up for it!

If people can’t afford what they want then don’t lend them more money that they can’t borrow elsewhere – either they should save more or wait until what they want gets cheaper.